Chinese 2013 MRO Growth Rate Falls Short

Chinese MRO demand for 2013 disappoints, but the industry sees a return to trend

In China, growth is taken for granted; disappointments come when it is not what was expected.

As China's airlines have suffered weakening demand over the past year, an echo has been heard in the maintenance shops that support their operations. Like the airlines, some in the maintenance field are finding that although business has been up it is not as strong as had been expected.

New opportunities are on the horizon, however, in the form of new airlines unaffiliated with China's major state carriers. That is especially good news for maintenance shops that are similarly unaffiliated. And the prospect of a permanent slowing in China's economy may be offering a crucial advantage for the maintenance industry that it has barely considered: prolonged competitiveness.

Industry-wide figures are not available, but one of the major airframe maintenance shops in China, partly owned by one of the biggest airlines, says it planned for 10-12% business growth for 2013, measured in worker hours. Instead, it grew 7-8%. Another, Taeco of Xiamen, says it was not optimistic about demand from Chinese customers at the end of 2012 when it made its 2013 business plan, and the business turned out to be no better than expected.

Not everyone has been much affected. Engine overhaul shop MTU Maintenance Zhuhai, which specializes in CFM56 and IAE V2500 engines, did not detect much of a downturn in business, says CEO Frank Bodenhage.

Although Chinese airline passenger traffic grew fairly strongly last year, demand was weak. The carriers evidently discounted to fill their aircraft, resulting in the disappointing operating results commonly reported across the industry. It may be that some airlines deferred maintenance, since aircraft that were due for major checks were not urgently needed in service.

This slow growth was probably just a temporary dip in the road, says Norbert Marx, general manager of Guangzhou-based airframe maintenance shop Gameco. “We will continue similar growth rates as were projected previously,” he says, pointing to the reliable figures on how many aircraft Chinese airlines have on order.

Other industry executives also think 2013 was a passing phase. Bodenhage expects 2014 to be business as usual. According to Jacqueline Jiang, commercial director of Taeco, that Xiamen-based company will probably adopt “more aggressive” targets for the Chinese airline business in 2014. Taeco was not greatly affected by the weakness of Chinese airline demand in 2013, she adds, because the company's business is oriented mainly to foreign clients. It has to be, because—unlike operators such as Ameco Beijing, ST Aerospace affiliate Starco in Shanghai, and Gameco—Taeco is not part-owned by a major Chinese airline.

So for Taeco, perhaps more than others, there is opportunity in the new policy of the Civil Aviation Administration of China to resume approval of new private airlines. Heavy airframe maintenance and engine overhaul business from those carriers is far away, point out Marx and Bodenhage, but Jiang notes that small airlines may want to outsource more of their technical operations, such as maintaining inventories. It is also a rule in the industry that supporting the low-revenue line maintenance of a new carrier can result, years later, in a loyal customer with a much larger fleet and considerable airframe overhaul work.

Weak demand for air travel in China has come with a slowing in the rate of economic growth, although another factor in 2013 was the government's campaign against corruption and extravagant spending of public funds by officials; the latter resulted in a cut in government travel.

There may be a bright silver lining to the economic cloud, however. The international competitiveness of the Chinese airframe maintenance industry ultimately rests on modest wage rates and good labor efficiency. For years, executives in maintenance, airline operations and aircraft manufacturing have said that wages have been rising by about 10% a year, driven by employees' alternative work opportunities. It has been impossible to improve efficiency every year to fully offset the higher labor costs.

The unavoidable implication is that one day the Chinese industry will be uncompetitive. Already Lion Air in Indonesia, where average incomes are much lower, is setting up a large maintenance base on Batam, an island near Singapore (see page 60). Vietnam, with an airline industry that will rank among the largest in Southeast Asia, should also be well positioned. No doubt both of those countries, and other newcomers, will have a lot to learn. Achieving adequate labor efficiency will be a challenge—as it was for China at first.

The Chinese economy is now growing at 7-8% a year, down from 10-11% in the last decade and earlier. Some economists expect it to slow further. If it does, air traffic will not grow as fast as it would have, but wage increases will also not be so high. So the day of reckoning for the Chinese airframe maintenance industry is still some way off.